Prudential Regulators Proposed Rule: Margin and Capital Requirements, September 2014
|Re-proposed Rule Issue||Final Rule Issue||Effective Date|
|September 24, 2014||October 22, 2015||April 1, 2016|
One of the mandates of Title I of the Dodd-Frank Act is that the appropriate regulators develop a framework for swap dealers and major swap participants, which include the setting of margin and capital requirements. Entities under the jurisdiction of a prudential regulator such as the FDIC are required to follow its rules. All other swaps are under the jurisdiction of the CFTC, with the exception of security-based swaps, which fall under SEC jurisdiction. For more information, see the summary table of swaps definitions.<ref>Agencies Reopen Comment Period on Swap Margin and Capital Proposed Rulemaking. Federal Reserve. Retrieved on September 26, 2012.</ref>
On September 3, 2014, five U.S. regulatory agencies ("Prudential Regulators") issued a joint rule proposal and request for comment regarding the establishment of minimum margin and capital requirements for covered swap entities - registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants for which one of the Agencies is the prudential regulator. The agencies consist of:
- Office of the Comptroller of the Currency, Treasury (OCC);
- Board of Governors of the Federal Reserve System (Fed);
- Federal Deposit Insurance Corporation (FDIC);
- Farm Credit Administration (FCA); and
- Federal Housing Finance Agency (FHFA).<ref>Margin and Capital Requirements for Covered Swap Entities. FDIC. Retrieved on May 10, 2011.</ref>
The proposal, which builds on a rule initially proposed in April 2011, would establish minimum requirements for the exchange of initial and variation margin between covered swap entities and their counterparties to non-cleared swaps and non-cleared security-based swaps.<ref>Agencies Seek Comment on Swap Margin Requirements. Federal Reserve. Retrieved on September 4, 2014.</ref>
Under the proposal, covered swap entities whose commercial activity is regulated by one of the above agencies would be required to comply. Swaps transactions entered into by an entity not covered by a prudential regulator would be subject to CFTC and SEC regulations regarding swap dealers and major swap participants.
The rule appeared in the Federal Register on September 24, 2014 and the deadline for public comment was November 24, 2014. Comments may be viewed HERE.
The proposed rule applies to the largest and most active participants in the OTC derivatives market that have been designated by the Commodity Futures Trading Commission (CFTC) or the Securities Exchange Commission (SEC). These are referred to as "covered swap entities." Highlights of the proposal, according to the FDIC press release:
- "Covered swap entities would be required to collect initial margin and variation margin from other covered swap entities.
- The amount of margin that would be required to be collected by covered swap entities from other counterparties would vary based on the relative risk of the counterparty and the swap.
- Commercial end users of derivatives would not be required to post margin unless their activity exceeds the risk limits of the entity with which they are transacting.
- Low-risk financial end users, including most community banks, would not be required to post margin unless their activity exceeds substantial thresholds or the risk limits of the entity with which they are transacting.
- The proposal establishes minimum quality standards for acceptable margin collateral. It also establishes minimum safekeeping standards for collateral posted by covered swap entities to assure that collateral is available to support the trades and not housed in a jurisdiction where it is not available if defaults occur.
- Only new trades entered into after the proposed effective date, six months after finalization, would be subject to the proposed requirements."<ref>Financial Institution Letter: Margin and Capital Requirements for Covered Swap Entities. FDIC. Retrieved on May 10, 2011.</ref>
The entire proposal as it appeared in the Federal Register can be found below.